Question: (Risk-adjusted discount rates and risk classes) The G. Wolfe Corporation is examining two capital-

budgeting projects with 5-year lives. The first, project A, is a replacement project; the second, project

B, is a project unrelated to current operations. The G. Wolfe Corporation uses the risk-adjusted

discount rate method and groups projects according to purpose, and then it uses a required rate of return

or discount rate that has been preassigned to that purpose or risk class. The expected cash flows

for these projects are given here:

PROJECT A PROJECT B

Initial investment -$250,000 -$400,000

Cash inflows:

Year 1 $130,000 $135,000

Year 2 40,000 135,000

Year 3 50,000 135,000

Year 4 90,000 135,000

Year 5 130,000 135,000

The purpose/risk classes and preassigned required rates of return are as follows:

PURPOSE REQUIRED RATE OF RETURN

Replacement decision 12%

Modification or expansion of existing product line 15

Project unrelated to current operations 18

Research and development operations 20

Determine each project’s risk-adjusted net present value.